When homeowners fall behind on property tax repayments, their homes become tax delinquent. The municipality will remind them to pay. However, if they don’t, the property will be sold at a tax sale.
Buying tax-delinquent properties is an excellent way to develop your portfolio. You can improve them and convert them into rentals or sell them. However, although these properties are often sold at deep discounts, they also have risks. For this reason, it’s crucial to understand how they work.
Below, we share best practices for buying tax-delinquent properties.
Learn Local Laws and Procedures
Tax delinquent properties are bought in large numbers depending on the municipality. This includes the type of sale, redemption period, bidding process, and payment method. Before buying these properties, you must learn the local tax sales laws.
Do they hold tax deeds or tax lien sales? Do they have redemption periods? Answering these questions can mean the difference between walking out of a tax sale as a new property owner and waiting several months or years before foreclosure on the property.
If you are interested in owning properties outright, you should look for municipalities conducting tax deed sales with no redemption period, not tax lien sales.
Get Information as You Can About the Property
Delinquent properties are sold ‘as is’, and no home inspection is typically performed before real estate sales. This means you could end up with a property with a leaking roof, mould, or a completely damaged interior, but you should still make these investments.
Conduct thorough research on the property by looking for public details. Do a title search to uncover any other liens and encumbrances attached to the property or disputes in ownership. If that is manageable, get as close to the house as possible to see how it looks. Ask a neighbor what they know about the property.
Set a Budget and Stick to It
You will want to set a budget depending on the property’s condition. Having a budget is important because you may spend less without one. Talk to a real estate agent in the area to get an idea of the market.
Determine your budget’s maximum bid, repair cost, and potential legal fees. Keep in mind that the cost of repairs may exceed your expectations. Set aside funds for unexpected expenses like more extensive repairs.
Make Your Best Bid First
Depending on the bidding process, you can use several strategies. For instance, you’ll only get one bid if it’s a public tender. In this case, you must give your most competitive bid. Whether it wins or not depends on whether other bidders believe the property is more valuable and are willing to pay more than you can.
Have a Plan for the Property
Before bidding on a property, have a clear plan for what you will do with it. If you do, you will be stuck with it with no idea of how to make a profit. This can be challenging, especially for novice investors needing more funds.
Depending on the property’s location, you can fix it up and rent it out as you wait for it to appreciate. If you need quick money to invest elsewhere, you could sell it with or without major repairs.
Wait Until the Redemption Period Expires
As a novice investor in delinquent properties, you may think it will save you time to fix a property during the redemption period. However, that would be a mistake. Making repairs or renovations during this time is like working on someone else’s house and hoping they sell it to you. The original owner can still pay the debt and return the property.
If this happens, they’ll only pay you the amount you paid at the auction plus the predetermined interest. They will not have to pay for renovations or repairs. Always wait until you have full ownership before buying tax-delinquent properties.
Network with Professionals
You must connect with experts in this area to develop a real estate portfolio with tax-delinquent properties. Talk to real estate lawyers who focus on these types of properties. They can help you understand the tricky legal issues of buying tax-delinquent properties.
Real estate agents are also important because they know about local market conditions, trends, and property values. Experienced investors in tax-delinquent properties can be mentors and give you valuable advice.
New and experienced investors can invest in tax-delinquent properties. However, you need to understand their potential risks and rewards before investing. This way, you can follow best practices to mitigate risks and increase your chances of profit.
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